Learning Materials For Accounting, Management , Finance And Economics.

Friday, July 16, 2010

Factors Affecting The Amount Of Depreciation

Different factors such as cost, scrap value, estimated life of assets etc. affect the amount of depreciation. Following are the important factors which should be considered for determining the amount of depreciation.

1. Cost Of Assets

The cost of asset include the purchase price, less any trade discount plus all the costs essential to bring the asset to a usable condition.In other word, the total cost of asset includes from purchase price to the installation.

2. Estimated Scrap Value

Scrap value refers to the value estimated to be realized after the expiry of the useful working life of the asset. This is also known as residual value or salvage value. Depreciation should be determined after deducting the estimated scrap value from the cost of asset.

3. Estimated Useful Life

An asset can not work forever. Every asset has a certain working and useful life. The longer the working life, the amount of depreciation will be lower and vice verse. Therefore, the useful life of an asset is generally to be taken in terms of asset's expected use. This estimated useful life of asset determines the rate or the amount of depreciation.

4. Legal Provisions

The amount of depreciation also depends upon the statutory and legal provisions prescribing the admissible rate of depreciation on fixed assets.